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Definitions and Basics

Definition:

A producer is someone who creates and supplies goods or services. Producers combine labor and capital—called factor inputs or factors of production—to create—that is, to output—something else. Businesses—called "firms"—are the main examples of producers and are usually what economists have in mind when talking about producers. However, governments are producers of some kinds of services—such as police services, defense, public schools, and mail delivery—and sometimes goods, such as when a government owns the oil fields and oil production (for example, OPEC). Households and individuals are producers of non-market goods and services such as cleaning, child-rearing, cooked food, etc.

Producers pay wages to workers. Wages include salaries, bonuses, and benefits such as health insurance. What producers pay for capital is called economic rent. Economic rents include interest pyaments. Anything left over for the owner of the business is called economic profit.

Corporations are easier to create than to understand. Because corporations arose as an alternative to partnerships, they can best be understood by comparing these competing organizational structures....

In the News and Examples

Brendan O'Donohoe of Frito-Lay talks with EconTalk host Russ Roberts about how potato chips and other salty snacks get made, distributed, and marketed. The interview follows an hour-long tour of a local supermarket where O'Donohoe showed Roberts some of the ways that chips and snacks get displayed and marketed in a modern supermarket. The conversation is a window into a world that few of us experience or are even aware of--how modern producers and retailers make sure the shelves are stocked and their products get noticed.

CEOs of multinational corporations, exotic dancers, and children with lemonade stands have at least one thing in common. They all expect a return for their effort. Most workers get that return in a subtle and ever-changing combination of money wages and working conditions. This article describes how they changed for the typical U.S. worker during the twentieth century. ...

Although labor unions have been celebrated in folk songs and stories as fearless champions of the downtrodden working man, this is not how economists see them. Economists who study unions--including some who are avowedly prounion--analyze them as cartels that raise wages above competitive levels by restricting the supply of labor to various firms and industries.

Many unions have won higher wages and better working conditions for their members. In doing so, however, they have reduced the number of jobs available in unionized companies. That second effect occurs because of the basic law of demand: if unions successfully raise the price of labor, employers will purchase less of it. Thus, unions are a major anticompetitive force in labor markets. Their gains come at the expense of consumers, nonunion workers, the jobless, taxpayers, and owners of corporations....

Interest is the price people pay to have resources now rather than later. Resources, of course, can be anything from college tuition to a big-screen TV. Interest is conventionally expressed as a percentage rate for a period of one year. If borrowers (those who want resources now) can obtain the resources from lenders (those who are willing to surrender current control) on the condition that they return 103 percent of the resources one year later, then the interest rate is 3 percent....

In 1980, fewer than ten million people were enrolled in HMOs. Today, more than seventy-four million are, about one in four Americans. Three-fourths of all employees with health insurance are covered by some type of managed care. What difference has this change made?

First of all, it has meant fewer choices for patients and doctors. Only a few years ago, a person with private health insurance could see any doctor, enter any hospital, or (with a prescription) obtain any drug. Today, things are different. In general, patients must choose from a list of approved doctors covered by their health plans. But because employers switch health plans and employees often switch jobs, long-term relationships between patients and physicians are hard to form. Moreover, many people cannot see a specialist without a referral from a "gatekeeper" family physician or even get treatment at a hospital emergency room without prior (telephone) approval from their managed care organization. Patients who fail to follow the rules may have to pay part or all of the bill out of their own pockets....

Economic analysis of advertising dates to the 1930s and 1940s, when critics attacked it as a monopolistic and wasteful practice. Defenders soon emerged who argued that advertising promotes competition and lowers the costs of providing information to consumers and distributing goods. Today, most economists side with the defenders most of the time....

A Little History: Primary Sources and References

But Bôhm-Bawerk's third reason--the "technical superiority of present over future goods"--was more controversial and harder to understand. Production, he noted, is roundabout, meaning that it takes time. It uses capital, which is produced, to transform nonproduced factors of production--such as land and labor--into output. Roundabout production methods mean that the same amount of input can yield a greater output. Bôhm-Bawerk reasoned that the net return to capital is the result of the greater value produced by roundaboutness....

All men eagerly long for security. We do indeed find a few restless, adventurous individuals in the world for whom the thrill of the unknown is a kind of emotional necessity. Nevertheless, we can affirm that men, taken as a whole, want to be free of fear for their future, to know what to count on, to arrange their lives in advance. To understand what store they set by security, we need only to observe how eagerly they rush into government employment. Let no one say that they do so because of the prestige of public service. There are certainly civil service positions in which the work involved is far from being of a high order. It consists, for example, in spying on one's fellow citizens, prying into their affairs, annoying them. Yet such positions are nonetheless sought after. Why? Because they represent security. Who has not heard a father say of his son: "I'm trying to get him on the list for a temporary appointment in such and such a government bureau. Naturally, it's irritating that they require such a costly education. It's also true that with that kind of education, he might have gone into some more brilliant career. As a government functionary he will never get rich, but he will be sure of his living. He will always have enough to eat. In four or five years he will be getting a salary of eight hundred francs; then he will go up, step by step, to three or four thousand. After thirty years of service, he can retire on his pension. His livelihood is therefore assured. It's up to him to learn to live moderately and humbly, etc."...

Advanced Resources

The governance of corporations encompasses a wide range of checks and balances that affect the monitoring and incentives of firms' management. Sound corporate governance is particularly important when a firm's managers are not the owners. Without appropriate corporate governance, nonowner managers might not work very hard to maximize profits for shareholders and instead might spend money on perks and pursue the quiet life--or some other goal near and dear to the hearts of the managers such as personal profit maximization involving theft or fraud. The difference between the goals of the principals (i.e., owners) and the goals of their agents (i.e., managers) is typically called the "agency problem." Aligning the incentives of the managers so that they act in the interest of the owners rather than themselves is the core challenge of corporate governance....

[This is the original book that worked out the economics of wages and returns to capital (economic rents) as presented in classrooms today—the marginal products of labor and capital. Difficulty level: very advanced.]

Related Topics

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.